The Takeoff Episode 02: How Startups Can Adapt and Pivot Sponsored This content is created collaboratively with one of our sponsors.
If you’re trying to argue that you are transforming transportation in one of the more radical ways since the invention of the car, it doesn’t hurt to be able to make a splash now and then. Especially one that gets your critics wet.
Call it Elon Unchained.
With the early repayment yesterday of Tesla Motors Inc.’s loan from the U.S. Energy Department, Chief Executive Officer Elon Musk is free to run the electric-car maker for the benefit of himself and other shareholders.
As a co-founder of PayPal, CEO of rocket maker Space Exploration Technologies Corp. and chairman of solar power company SolarCity Corp., Musk has proven he’s a free thinker who can turn those ideas into billions. What happens with Tesla now that he can do anything he wants? The possibilities are broad.
“I do feel as if it’s a weight off our chest,” Musk said yesterday in his first interview after the repayment was announced. “We did get criticized quite a lot for taking government funding, even though during the first several years Tesla was privately funded — mostly from me. I put my last money into Tesla in late 2008 just to keep the company alive.”
Tesla yesterday paid the Energy Department $451.8 million remaining on the Advanced Technology Vehicles Manufacturing loan Tesla was awarded in 2009. Settling the debt earned taxpayers $15 million to $20 million, Musk said. The Energy Department puts the profit closer to $26 million.
Conditions of the loan issued through a green-cars program created under President George W. Bush and implemented by President Barack Obama included keeping officials apprised of business plans. Musk, Tesla’s top shareholder, couldn’t sell more than 65 percent of his stake as of Tesla’s 2010 initial public offering, nor could he merge it with another company.
Repayment gives Tesla more flexibility and “removes some operational covenants that are in place,” said Elaine Kwei, an equity analyst for Jefferies Equity Research in New York, who rates Tesla a buy. “Not to mention it’s also great for P.R.”
Tesla slipped 0.4 percent to $87.24 yesterday at the close in New York. The shares rose 158 percent this year through yesterday, outstripping the 16 percent gain for the Russell 1000 Index. Gains for Tesla shares, along with SolarCity, have raised Musk’s fortune to $5.4 billion, according to the Bloomberg Billionaires Index.
Some investor interest in Tesla, which counts Daimler AG and Toyota Motor Corp. as shareholders and customers, is that the carmaker will win more tie-ups, said analyst Ben Kallo of Robert W. Baird & Co., who rates Tesla outperform.
“Expanding relationships they have with Toyota and Daimler and possibly even adding new relationships is always at the forefront of investors’ minds,” he said. “More so now than ever after they get this loan behind them.”
Daimler has 4.87 million Tesla shares valued at $425 million, while Toyota has 2.94 million shares valued at $257 million, according to data compiled by Bloomberg.
Musk, 41, said earlier this month that he wouldn’t anticipate stepping away from Tesla for “several years” and that an acquisition by another carmaker isn’t likely.
To a large, established automaker, “Tesla just seems very expensive,” Musk said on May 2, when the company was valued at $6.24 billion. “How many cars do we make? What’s our market cap? It seems nutty to them.”
After selling 4,900 Model S sedans in the first quarter and reporting its first three-month profit this month, Tesla’s market valuation soared above $10 billion, bigger than Fiat SpA, which sells 1 million vehicles a quarter, including those of Chrysler Group LLC, which it controls.
Still, an acquisition is “one of the possible outcomes, I suppose,” he said. Rather than an auto company, “I’d guess it would come from outside the auto industry. It would be a buyer with a very large cash position,” he said.
While he declined to speculate on possible buyers, he did acknowledge that Apple Inc. qualifies as a company with a lot of cash.
Steve Dowling, a spokesman for Apple, declined to comment.
In the interview yesterday, he said he hasn’t had any discussions with Apple beyond iPhone integration, and isn’t looking to be acquired by anyone until he can produce “a compelling, affordable car” that is less expensive than the Model S and nicer than Nissan Motor Co.’s electric-powered Leaf.
“With the Model S, you have a compelling car that’s too expensive for most people,” he said. “And you have the Leaf, which is cheap, but it’s not great. What the world really needs is a great, affordable electric car. I’m not going to let anything go, no matter what people offer, until I complete that mission.”
Musk’s surprising success up to this point with Palo Alto, California-based Tesla, including this month’s $1 billion in fundraising, “is a perfect example of ‘don’t give up too early,”’ said Elaine Eisenman, dean of executive and enterprise education at Babson College in Wellesley, Massachusetts.
“He was single-minded in his vision that the car would work, and it would be the right thing, but didn’t shut himself off and insulate himself from all the criticism,” Eisenman said.
South African-born Musk shares similarities to Apple’s late co-founder Steve Jobs, an executive he has cited as an influence, Eisenman said.
“He has the creative spark that Jobs had, and he has the vision and willingness to stick with the core of it that Jobs had,” she said.
The rapid change in Tesla’s fortunes also presents risks.
“The danger becomes, now that the market is applauding him, taking him seriously, that he decides he doesn’t have to keep listening to the marketplace,” she said.
Musk has beaten odds that felled John DeLorean and Preston Tucker. The Model S sedan, priced from $69,900, snagged Motor Trend magazine’s Car of the Year and a rave review from Consumer Reports. Should Tesla remain a going concern, it would be the first new U.S. automaker to do so since Walter Chrysler founded Chrysler Corp. in 1925.
“Long-term sustainability is the toughest thing for a car company,” Joseph Phillippi, principal of consulting firm AutoTrends Inc. in Andover, New Jersey, said in a telephone interview. “Look how many crashed and burned over the years. Most didn’t even get up to the point where they could crash.”
Casualties of the capital-intensive, highly regulated auto business include DeLorean Motor Co. and Tucker Corp. Fisker Automotive Inc., a would-be Tesla rival in the luxury green-car segment, hovers near bankruptcy while seeking a buyer for its plug-in hybrid car business. Fisker fired most of its staff in April, stopped making $103,000 plug-in Karma sedans last year and missed its first federal loan payment in April.
At Tesla, it’s about as different as can be. Even after paying off the loan, the company has said it would have more than $600 million remaining from the sale of shares and debt to develop an electric sport-utility vehicle due in 2014, followed by a model priced below $40,000 a few more years later.
“They have a very solid balance sheet after this capital raise to fund their growth,” said Kallo, the Baird analyst.
“One of the things that’s been occurring as Tesla stock has run up is the Tesla brand is beginning to be given a value as an automotive company and a technology leader,” Kallo said. “Tesla has separated itself from other electric-vehicle manufacturers and other battery makers as really the leader in technology for electric vehicles.”
Musk is an irreverent auto-industry figure who shares qualities with outsize personalities such as former General Motors Co. Vice Chairman Bob Lutz and Honda Motor Co. founder Soichiro Honda, Phillippi said.
“He’s as iconoclastic as Bob Lutz, shaking up everything, which is what Bob tended to do at Chrysler and GM,” said Phillippi, a former equity analyst for UBS Warburg. “Honda was another company driven by a visionary founder with a level of intensity rivaling Musk.”
Overconfidence is a potential hazard, he said.
“The biggest risk is that he reaches too far, too fast,” Phillippi said.
Restrictions on Tesla by the Energy Department weren’t too burdensome for the company, Kallo said.
“Shareholders and people that shorted the stock, and there’s still quite a considerable amount of people who are, are bigger critics than the DOE would be,” he said.
Musk said ending the government oversight wasn’t as much of a financial issue as a “moral” and commercial one.
“There are a lot of people that criticized us for having a government loan at all, even though we received the smallest loan of anyone,” he said. “We received a lot of flak for it, and it was held against us. For some people, that was an issue in buying a car.”
With assistance from Angela Greiling Keane in Washington and Adam Satariano in San Franciso. Editors: Jamie Butters, John Brecher. To contact the reporter on this story: Alan Ohnsman in Los Angeles at firstname.lastname@example.org. To contact the editor responsible for this story: Jamie Butters at email@example.com.